China sales notice weakens resolve in cotton futures

June 11, 2015 at 2:44 pm

Cotton futures, which shrugged off somewhat bearish US crop data in the last session, proved less resilient against news that China is to restart sales from its huge reserves, which account for roughly half of world inventories.

Yin Jian, an official at China’s influential National Development and Reform Commission, said that the country was within the next 10 days to issue plans of sales from state inventories, which have been swollen by a subsidy scheme, now ditched, which offered farmers a price well above world market rates.

A fresh batch of sales from Chinese reserves was not unexpected by the market.

The International Cotton Advisory Committee highlighted last month that “in the last two seasons, sales from China’s national reserve were well underway in April with around 1.3m tonnes sold at the end of April 2013 and 1.4m tonnes at the end of April 2014”.

Nonetheless, the announcement – with its inherent risk of pressure on prices in China and, given that the country is the world’s top importer, the global market too – prompted a retreat in New York values which had stood firm in the last session against somewhat disappointing USDA supply estimates.

Cotton futures for July stood 1.0% lower at 64.25 cents a pound in early deals in New York, falling back below their 75-day moving average.

The well-traded, new crop December lot dropped 1.0% to 65.05 cents a pound, falling back below its 100-day moving average.

Stocks dispute

While the exact amount of cotton in China’s state stockpiles is not known, the International Cotton Advisory Council said that the Chinese government “still holds over 11m tonnes” (50.5m bales) of the fibre, compared with a world total seen ending this season at some 22m tonnes.

The US Department of Agriculture on Wednesday, in its monthly Wasde crop report, forecast China’s overall cotton stocks ending this season at 65.6m bales (14.3m tonnes), out of a world total of 110.0m bales (23.9m tonnes).

That represented a small downgrade, of 240,000 bales, on the previous estimate for carryout stocks in 2014-15, reflecting a weaker Indian output estimate.

Nonetheless, the data were termed somewhat bearish by many commentators in not including a downgrade to the US stocks forecast.

Strong exports so far this season, which ends next month, had prompted expectations that the USDA would lift its estimate for US exports from 10.7m bales, and cut its stocks forecast accordingly from 4.4m bales.

‘Less than supportive’

Louis Rose, at the Rose Cotton report, said that the Wasde data was “less than supportive”, with the decision to stick with the export number “particularly disappointing”.

Rabobank said that it was still expecting an export upgrade ahead by the USDA, noting that importers had already committed, through actual shipments or orders, to 10.9m bales of US cotton in 2014-15.

“With eight weeks of data remaining this marketing year,” the next batch due later on Thursday, “there would be a considerable volume of [US export] sales to roll over to 2015-16”.

Indeed, the bank said it was maintaining a “bullish view” on new crop cotton futures, foreseeing also that Chinese imports will hold at about 8m bales next season, well above the USDA forecast of 6.0m bales.

Veteran soft commodities analyst Judith Ganes-Chase said that for the US, “with 10 weeks of the season remaining, only 131,226 running bales needs to be shipped each week” to meet the USDA export estimate for 2014-15.